Residential mortgage delinquencies and foreclosures continue decline despite higher interest rates. Economist and lenders say the decreases can be attributed to the recent home-loan refinancing boom and a strong national economy.

According to the Mortgage Bankers Association of America's quarterly survey, the seasonably adjusted delinquency rate of an loans in the third quarter fell to 3.9% - the lowest level in 21 years. That's down 31 basis points from the second-quarter figure.

Every region and loan type experienced a drop in the delinquency rate. Only foreclosure rates in the western region climbed in the third quarter - just 3 basis points, to 0.94%. Foreclosures are largely a trailing indicator. Most economists were surprised - not so much by the decline in delinquency, but by its size.

"This is the time you certainly expect good credit quality," said Gary Gordon, a PaineWebber Inc. analyst. He said stellar job growth and a robust economy has buttressed borrowers.

Robert R. Davis, chief economist for Savings and Community Bankers of America, said the recent refinance boom over the last few years has dramatically reduced the monthly mortgage payments borrowers make. He said that has kept borrowers on steady financial ground and contained any growth in delinquency rates.

Joe Pickett, president of the mortgage bankers group, "guesstimates" that 80% of all one-to-four-family loans in lenders' portfolios today are less than three years old, and they are receiving an average interest rate of 8%.

Gary L. Ciminero, chief economist, Fleet Financial Group, Providence, R.I., did not think the economy was strong enough on its own to keep down delinquency rates. His theory: Weak borrowers are no longer in the market, shaken out during the refinance boom.

Low delinquency rates have increased the values of servicing portfolios nationwide. Mr. Pickett expects servicing values and prices to remain firm.

But economists generally predict the current delinquency rates will not last.

"Looking at the future, I think it is inevitable that delinquency rates will rise," said David Lereah, chief economist for the trade group.

Mr. Ciminero said, "The good news is behind us." Industry observers predict delinquency rates will balloon within the next one to three quarters.

They base their predictions on a waning national economy, higher interest rates, and the aging of loans.

The SCBA's Mr. Davis said the economy "will be much worse next year." He said the growth rate of the economy will be more like 2% next year, down from a hearty 4% this year.

"That snap in the economy will have some impact on delinquency rates, but I don't think it will be a large one," he said.

Higher interest rates mean adjustable-rate loans - the mortgage of choice since February - will reach much higher rates, observers say. At the SCBA's winter management conference this week, some thrift executives feared delinquency would rocket up once ARMs with rock-bottom teaser rates begin adjusting.

Other observers expect delinquency rates to climb with time. They said older loans were more likely to become overdue.

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